Mortgage insurance vs. homeowners insurance

If you’re a first-time homebuyer, there’s a good chance you’ve come across the term “mortgage insurance.” And if you’re like a lot of homebuyers we talk to, you’ve probably wondered how it’s different from homeowners insurance.

Let’s look at both types of insurance so you can understand whether you need either or both.

What is the difference between mortgage insurance and homeowners insurance?

Mortgage insurance and homeowners insurance are both policies that deal with your home, but in very different ways. The biggest difference is whom the policy protects. Mortgage insurance covers the mortgage lender while home insurance covers you, the homeowner. 

Mortgage insurance vs. homeowners insurance

How mortgage insurance works

Mortgage insurance is often required by lenders when homeowners don't have enough money to make a down payment. The homeowner pays the premium, and the lender is protected if the homeowner defaults on the loan. Policies cover a percentage of the loan and pay out if the home’s value falls short of the price paid at the foreclosure sale.

Who needs mortgage insurance?

If you can put 20% of the home’s cost “down,” banks usually don’t require private mortgage insurance (PMI). That’s because, if you miss a payment, the bank has a decent pile of cash already. Your down payment gives the bank a reasonable chance of covering its cost If it has to foreclose on the house and resell it.

But if your down payment is less than 20%, then lenders will most likely require PMI. Getting a PMI policy helps lenders manage the risk that a borrower might stop making payments on their mortgage loan (aka default on the loan).

It’s in lenders’ best interest to make paying mortgage insurance easy, so borrowers usually have several payment options. One of the most popular is to pay monthly, as part of a bundle with your mortgage payment.

How long do you pay mortgage insurance?

One of the biggest differences in homeowners insurance versus mortgage insurance is that homeowners can usually stop paying mortgage insurance once they have at least 20% equity in their home. When borrowers hit that threshold, their private mortgage insurance is often canceled automatically  unless they have arranged for it to continue. 

Now let’s take a look at homeowners insurance.

How homeowners insurance works

Homeowners insurance is a policy that covers you, the homeowner, for various things that could go wrong on a property you own. (You’re considered the owner even if you buy a property with a mortgage loan.) 

What does homeowners insurance protect?

A typical homeowners policy offers protection for:

• Damage to the home’s structure from certain events.

• Theft of or damage to your possessions that you keep inside your home.

• Liability you may have related to injuries or property damage that happens to guests at your home.

As the homeowner, you want to be protected for a wide range of things that can go wrong at your house.

Does my mortgage include homeowners insurance?

Your mortgage doesn’t include home insurance. However, most mortgage lenders require you to get coverage. In many cases, the premium is simply paid out of your escrow account.

Some mortgage lenders don’t require borrowers to escrow payments for their home insurance. When that happens, you have the option of not including your insurance premium in your mortgage payments. But it’s often easier to just include your homeowners insurance in your mortgage payments.

You may have noticed that your lender’s paperwork only mentions “hazard insurance,” meaning insurance that covers physical damage to the home itself. That’s because the lender wants to protect its interest in the property.

In other words, your lender fronted a bunch of money so you could buy your home. Until you’ve paid that money back, it wants to make sure you have a way to repair the home if something terrible happens to it. Otherwise, it won’t be able to resell the home and could lose a lot of money. Your lender doesn’t care what happens to all your stuff because it wouldn’t resell that anyway.

Do I need home insurance after my mortgage is paid off?

This is the biggest difference in homeowners insurance versus mortgage insurance. If you’re paying for mortgage insurance because you couldn’t afford a 20% down payment, then you can usually stop once you have reached 20% in equity. 

On the other hand, lenders generally require home insurance as long as you have a mortgage on their house. Even if you pay off your mortgage, it’s still in your best interest to carry a home insurance policy in case you face a catastrophe claim.

Whether you’re considering your first mortgage or have owned a home for decades, finding the right insurance is crucial to protecting yourself. If you’re not happy with your current homeowners insurance (price, customer service, etc.), get a quote from Kin. It only takes just minutes, and it could save you some serious money.